If manufacturers are going to flourish in America, they’ll need to buy a lot more robots. Here are six ways to play this hot trend.

By Jack Hough

Courtesy of FANUC

As President Donald Trump prevents manufacturers from leaving the U.S., expect them to use robots to keep labor costs down. While this trend is likely to be greeted with alarm by union leaders, the case can be made that using robots actually helps keep whole industries from exiting American shores.

Among U.S. car makers, which have been enthusiastic robot buyers in recent years, domestic employment has been not only steady, but rising. A far greater threat to U.S. workers than mechanized colleagues turning up at hometown plants is the warm welcome robots are receiving in China.

Already the world’s largest buyer of robots, China plans to close the gap with developed nations on robot density, or the number of robots in service per human worker. The idea isn’t just to drive down production costs. It’s to improve quality and one day compete more effectively in high-value goods like cars. It’s also to offset the million workers per year that China is expected to lose as its population ages. In the U.S., the demographic challenge is less dire, but present. The working population is growing slowly, at about 0.5% a year.

For long-term investors, robots could be one key to securing healthy corporate profit growth, and stock returns, even as wages rise. There are specific opportunities, too. Japan’s Fanuc (ticker: 6954.Japan) is far and away the U.S. market leader in industrial robots, and it’s quickly ramping up production. Its shares have been outperforming, and they could offer 20% more upside over the next year. Germany’s Kuka.XE in Your ValueYour ChangeShort position (KU2.Germany), which sold a majority stake last year to China’s appliance giant, Midea Group (000333.China), has similar return potential. Other stocks with high exposure to industrial robotics and factory automation include Rockwell Automation (ROK), Switzerland’s ABB (ABB), and Yaskawa Electric6506.TO in Your ValueYour ChangeShort position (6506.Japan). And for one-stop shoppers, there’s the Robo Global Robotics & Automation Index exchange-traded fund (ROBO), which tracks 85 stocks, charges annual expenses of 0.95%, and has returned 37% over the past year.

FACTORY ROBOTS LOOK nothing like Rosie from The Jetsons, the nameless B9 model from Lost in Space, or the one on the cover of this magazine. Many are hulking arms with rotating joints and interchangeable tools that can weld, stack, paint, assemble, and more. Among the robot definitions offered by Merriam Webster is “a mechanism guided by automatic controls.” The word itself is a play on a Czech word for forced labor, introduced in the 1921 play R.U.R., which stands for Rossumovi univerzální roboti (Rossum’s universal robots). Science-fiction writer Isaac Asimov introduced the term “robotics” and proposed a set of laws for them in his 1942 short story Runaround.

The first law, in brief, is that a robot may not injure a human being. This is more fiction than science. If there is a defining characteristic of robots that can lift cars or pack foods at blurring speeds, it’s that they’re quite capable of injuring humans. Until recently, factory robots have been isolated in cages. That is changing with the introduction of collaborative robots, which don’t lift as much, or move as fast, but can work side-by-side with people.

A Kuka robotic arm on a Mercedes-Benz assembly line Thomas Niedermueller/Getty Images

Roughly three-quarters of all robots are sold in five countries: China, South Korea, Japan, the U.S., and Germany, according to the International Federation of Robotics, a trade group. The auto industry has the most robots in use, but electronics and metals companies—which are in second and third place, respectively—have faster growth. Unit sales of industrial robots are expected to rise 13% a year through 2019, pushing the number of robots in operation to 2.6 million, up from 1.8 million currently.

Orders in China will gallop higher by 20% a year, predicts the IFR, compared with 5% to 10% in North America. The U.S. operates 176 robots per 10,000 workers, ranking eighth, between Denmark and Belgium. Japan, Germany, and Singapore are over 300, and Korea, over 500. China employs 49 robots per 10,000 workers but aspires to reach the top 10 by 2020, which would require fourfold growth.

ONE THING THAT COULD accelerate U.S. robot deployments is a corporate tax cut, which would reduce the overall cost of manufacturing in the U.S., but not the labor cost. Another is a border adjustment tax, which would reward exporters while penalizing importers. Accelerated depreciation on capital investments would give companies an immediate tax break on money spent to automate factories.

If the carrots don’t work, there’s always the stick. President Donald Trump used both—a TwitterTWTR in Your ValueYour ChangeShort position shakedown and a state tax perk—to lure United TechnologiesUTX in Your ValueYour ChangeShort position(UTX) to keep a Carrier air-conditioning factory in Indiana, rather than moving it to Mexico. The Mexico move would have been cheaper, United CEO Greg Hayes told a television interviewer, so he will invest in automation to close the gap. “You Are Paying to Replace American Workers With Robots,” read a subsequent headline at OurFuture.org, one of many responses from left-leaning Websites. The robot makers, naturally, disagree.

A family of Fanuc robots Courtesy of FANUC

“Robots save jobs,” says John Roemisch, vice president of Fanuc America. “You can’t do it the old way just because that employs the most people. If you don’t adapt, you’re not going to survive.” In Roemisch’s view, robots replace unpleasant or dangerous jobs, but also spawn new ones. “Instead of a worker picking up a screwdriver, the robot does that and the worker operates the robot,” he says.

“His skill level has to be a little bit higher, but it’s not like you need engineers on the shop floor.”

Indeed, newer robots come with features like intuitive touchscreen controls that decrease the amount of training workers need to use them.

That’s one thing driving down the cost of installing robots. Another is the spreading use of camera systems and pressure sensitivity—sight and touch senses—that allow robots to learn how to handle various objects on the go. Chips from companies with videogame expertise, like Nvidia (NVDA), make quick work of the heavy thinking. Networks allow groups of robots to learn from one another.

Collaborative robots, which require less investment in safety systems, promise to expand robotics to smaller factories and more varied applications.

Fanuc uses a simple color system to help customers tell its models apart at a glance. Yellow robots, the best sellers by far, are the ones that aren’t safe for human workers to be around. Green ones, the newest line, have soft outer shells, stop gently on contact, and can be pushed out of the way—yet some can still lift 70-pound objects with ease. White robots are for health-care and pharmaceutical use. Aluminum robots, used for painting, don’t get a coat of their own.

The cost savings for a well-placed robot can be substantial. According to an example cited by the Robotic Industries Association, a trade group, a typical $250,000 installation, including training and parts, can pay for itself in two years in reduced payroll costs and increased productivity. Seven or eight years in, the cumulative cash flow gained can reach $1.5 million. Once the upfront costs are paid, medium-size robots can cost just 50 cents an hour to operate, and large robots, $1.

IN A NOVEMBER newspaper interview, Trump was asked whether he was worried about losing jobs to robots. His answer was that America should make the robots. That’s a worthy long-term goal, and the U.S. is a leader in robot research and a player in the tiny market for service robots that vacuum floors, clean gutters, and the like, as well as surgical robots. For factory robots, however, the reality is that the U.S. long ago ceded the business to overseas competitors, which have mostly consolidated in Asia. If the U.S. is to keep up with China in factory automation, it will have to use outside suppliers for now. And it should.

“Historically, the reason China hasn’t been able to export its cars is that the cars are crap, and that’s because they’ve been made using humans, rather than robots,” says Frank Tobe, editor of the Robot Report, an industry newsletter. “Now, China has a strategic long-term plan to deploy more robots, and the U.S. is only giving lip service.”

The automotive market is one where the U.S. has regained competitiveness in the face of fierce overseas competition. It’s also one where the U.S. ranks near the top in robot density: over 1,200 robots per 10,000 workers. Policy makers should think in terms of how to support duplicating that success across other manufacturing industries. More robots means more market share and, ultimately, more and better jobs.

FOR INVESTORS, ROBOT STOCKS have rarely traded cheaply relative to measures of fundamental value, such as earnings. Barron’s looked for bargains in the space four years ago and highlighted three (“Cheaper Robots, Pricier Stocks,” Jan. 19, 2013). Since then, Kuka has soared in value almost 250% to 97 euros ($103) a share, and Milwaukee-based Rockwell Automation has climbed 74%, to $153. ABB, a conglomerate with lower exposure to robotics than the others, has gained only a smidgen. We would have been better off with Fanuc, which is up 50%, to more than 22,000 Japanese yen ($193) per share. On average, our trio is up 110%, versus 60% for the Standard & Poor’s 500 index. The robotics ETF, which launched in October 2013, is up 27% since then.

For best bets now, favor companies with meaningful U.S. market share. China’s rapid growth is well understood, but an acceleration in U.S. robot demand might not yet be baked into earnings estimates.

That list includes Fanuc, with a 55% share, and Yaskawa, ABB, and Kuka, with about 10% apiece.

Rockwell, a partner to companies like Fanuc and Kuka, is the only sizable pure play on factory automation, which makes it a frequent subject of takeover speculation.

Click graphic for larger versión

Fanuc’s high U.S. market share dates back to the launch of a joint venture with General Motors (GM)GM in Your ValueYour ChangeShort position in 1982. It has a 10% share in China, too. In both countries, market share is constrained by Fanuc’s ability to produce robots, according to UBS analyst Hikaru Mizuno. The company is working to expand manufacturing capacity by about 60% through 2018—and yes, it leans heavily on its own robots to make new robots. Shares trade at a lofty 38 times projected earnings for the current fiscal year, which runs through this month. But profits are well below peak levels, due to currency effects, soft demand for machines used to make smartphones in China, and high costs to add capacity for robots that are selling well.

Mizuno sees Fanuc’s earnings per share rebounding 55% over the next two years, to JPY924. The shares trade at 24 times that figure.

Kuka, like Fanuc, is a key supplier of automotive robots. Its 2014 acquisition of Swisslog, which now accounts for 20% of revenue, added exposure to automation in warehouses and distribution centers, as well as hospitals. Kuka shares sell for 30 times last year’s estimated earnings. (Fourth-quarter numbers are slated for release later this month.) But Kuka, too, is giving up some margin in the near term to invest in longer-term growth. Management aims to boost annual revenue to €4 billion to €4.5 billion by 2020, up from an estimated €3 billion last year, and to drive operating margin above 7.5% from under 6%. That looks achievable; bulls see operating margin topping 9% by 2020. If they’re right, EPS by then could approach €6, double recent levels.

ABB IS LESS EXPENSIVE than the other names on this list, at 19 times last year’s earnings, versus 20 times for the S&P 500 index and 18 times for the Stoxx Europe 600. The trade-off is that, in addition to its automation divisions, source of about 45% of last year’s revenue, ABB has a big power-grid business, which competes with the likes of General Electric (GE) and SiemensSIE.XE in Your ValueYour ChangeShort position(SIE.Germany), and an electrification unit that goes up against Schneider ElectricSU.FR in Your ValueYour ChangeShort position(SU.France) and Eaton (ETN).

Overall EPS is below 2013 levels, but ABB has been divesting underperforming business lines like cables and making small acquisitions in automation and robotics. Some investors have called for a sale of the power-grid unit. For now, ABB is instead working toward cutting corporate bloat to save $1.3 billion a year. Morgan Stanley analyst Ben Uglow predicts a return to growth this year that will take EPS 57% higher by 2019. ABB is adding hundreds of jobs at a Michigan plant as part of a plan to begin making robots in the U.S., a first among major competitors. The company’s American depositary receipts recently sold for $22 and change.

Yaskawa collects two-thirds of its sales from Asian markets, especially Japan and China. China is working to foster robot development at home, which could one day pose a threat to Yaskawa. For now, analysts say, the company’s expertise in software applications and reliability set it apart from Chinese upstarts in manufacturing key goods like cars and semiconductors. Yaskawa, too, is reportedly considering making robots in the U.S., although it hasn’t announced any plans. At JPY2137, its shares trade at 28 times projected earnings for the fiscal year ending this month. Like Fanuc, it has been in a profit slump, but Wall Street predicts a return to growth, with earnings rising a cumulative 40% in the two years ahead.

Rockwell Automation trades at 24 times projected earnings for its fiscal year through September, well above its five-year average of 18. Put differently, it fetches a 33% premium to the S&P 500, up from an average of 9%. Growth potential is healthy, but unremarkable, projected at close to 10% a year, compounded, over the next three years. That’s reason for caution. But Rockwell, which says that 70% of its sales now include software, could one day make a strategic asset for a larger player. Rumors swirled last fall about a Schneider takeover, but were eventually dismissed. As a stand-alone, Rockwell’s returns from here could depend on its ability to beat earnings expectations. Last quarter, it did so by more than 20%. The earnings consensus for fiscal 2018 is up 4% since the end of December.

Among other U.S. names in robotics are privately held Rethink Robotics in Boston, maker of user-friendly collaborative robots called Baxter and Sawyer, and publicly traded companies with in-house robotics operations, like Amazon.comAMZN in Your ValueYour ChangeShort position(AMZN). It bought warehouse automation outfit Kiva Systems in 2012 and now uses tens of thousands of Kiva robots to whisk packages around. Now, Amazon is exploring residential package delivery using flying robots, also known as drones. And two years ago, privately held Uber poached 40 researchers and scientists from Carnegie Mellon University’s Robotics Institute to jump-start the ride-sharing company’s efforts in driverless cars.

AlphabetGOOGL ’s (GOOGL) Google unit, too, has a robot division—Boston Dynamics—which serves up the occasional viral video on YouTube. One last summer featured a robo-dog called SpotMini that can load the dishwasher. One from this past week, which has already been viewed five million times, features Handle, which, balanced upright on two wheels, stands 6½ feet and can jump four feet vertically. The commercial applications there are unclear, but perhaps the NBA’s small forwards should be nervous.

With seemingly everyone from the blogosphere to the Tweeter-in-chief chiming in on fake news, have investors considered their risk/return profile may also be "fake"? When it comes to investing, who or what can we trust, is the market rigged, and why does it matter?

For eight years in a row now, an investment in the S&P 500 has yielded positive returns.1 In recent years, expressions like "investors buy the dips" and "low volatility" have become associated with this rally.In the "old days", investors used to construct portfolios that, at least in theory, provided a risk/return profile that they were comfortable with. For better or worse, I allege those "old days" are over. To be prepared for what's ahead, let's debunk some myths.

The system is rigged

For those that say the system is rigged, I concur. In my assessment, central banks are largely responsible for a compression of "risk premia." All else equal, quantitative easing and its variants around the globe have made assets from equities to bonds appear less risky than they are. This is at the very core of central banks efforts to entice investors to take risks, as risk taking is key to making an economy grow. In practice, central banks have foremost pushed up financial assets, but have largely disappointed in generating real investments. As a result, those holding financial assets have disproportionally benefited.

Hidden risks: liquidity

When I look at market risks, I feel like investors are in 'la la land,' ignoring the moonlight. Pardon the pun, I believe investors completely underappreciate hidden risks in the markets, notably the risk of liquidity evaporating. In today's ETF driven world, to make ETFs track underlying indices, there are so-called market makers providing liquidity. Exchanges are providing incentives to these market makers; ever look at those exchange fees on your trade ticket? The exchange pays market makers from these fees for each share they buy or sell (ranging from fractions of a cent to multiple cents); such a "rebate" gives market makers a better price than you can possibly get, so they can cost effectively hedge their own risk, thus incentivizing them to provide liquidity. Each ETF has a so-called lead market maker that, by arrangement, gets a better deal than the other market makers. Through that, all the other market makers know they can always offload their risk to the lead market maker. Everyone is happy, including the investor. Except when the lead market maker has a glitch. Suddenly, just about everyone withdraws liquidity because something appears wrong. In addition, Dodd Frank discourages traditional market makers to provide liquidity. Flash crashes can then occur when investors place market orders in the wrong belief that the system will take care of them. As a result, in our opinion, the current design of the system makes the periodic flash crash a near certainty.Risk is merely masked

In the past, I have compared central bank efforts to suppress risk akin to putting a lid on a pressure cooker. It should come as no surprise that taking the lid off might cause a spike a volatility, e.g., a taper tantrum. In the meantime, while the European Central Bank (ECB) and Bank of Japan (BoJ) are still 'printing money', the Fed is trying to raise rates.

Investors desperate for insurance?

We talk to a lot of investors who go along for the ride as the market is rising, but are rather concerned the party could come to an end. Instead of rebalancing their portfolios or taking chips off the table, however, they are looking for ways to have their cake and eat it too by buying insurance. One way to buy insurance on equities is to buy put options on equities. Another is to buy volatility, i.e. take a speculative position that volatility in the market is going to rise. Through ETFs, such strategies are available to retail investors. It turns out that buying insurance can be very expensive (at times more than 10% a month in case of buying volatility), making this not a prudent long-term investment. As with anything else in this analysis, we are observing what we see in the market, we not making an investment recommendation.

Selling volatility: a risky proposition?

It wouldn't be Wall Street, if there weren't investors on the other side of the trade of those trying to buy insurance: selling volatility has become a very fashionable trade. The idea is that so long as volatility stays low, one collects the equivalent of an insurance premium; when volatility surges, one loses money, those writing insurance might believe that those surges and associated losses are always temporary (buy the dips, remember!); over the medium term, so the logic goes, such a strategy promises to be profitable. To be clear: we do not recommend investors pursue this strategy even as such strategies have become increasingly popular. Amongst others, a single mutual fund pursuing a strategy building on that concept had amassed over four billion in assets. After all, what could possibly go wrong? What has gone wrong is that a few weeks ago, the fund experienced substantial loses in the absence of a surge in volatility. What appears to have happened is that a too-good-to-be-true strategy became victim of its own success. In our analysis, the fund encountered a particular constellation where their derivatives position was inherently difficult to manage, with difficulties exacerbated because of their size. Differently said, they were cornered. More than a few investors appear to have concluded that they didn't sign up for the risks that materialized and have withdrawn their investments.

Market melt-up?

Above, we discuss a mutual fund being cornered. While the fund management brushed off that they would impact the market as a whole, our internal analysis suggests otherwise. As the fund is liquidating its position, the net effect on the market that we have observed is upward pressure on equities and downward pressure on volatility (this is due to how market makers hedge their books as they mitigate their own risk of helping the fund to unwind its position). While one can observe the stress in the market in characteristics of specific options, the casual observer might think everything is normal. The management of the fund indicated its troubles are over, but as of this writing, our assessment suggests they continue to be cornered as they liquidate positions to cater to redemptions. It isn't just one mutual fund that tried to harvest carry from low volatility, we have seen the growth of an entire cottage industry. There's a host of other strategies, including some of the so-called risk-parity strategies, that could similarly create market distortions if and when unwound. We believe it is plausible that much of the upward pressure in equity markets on the backdrop of low volatility may well be due to the unwinding of some of these strategies.

Fed being fooled?

If much of the feel-good-rally in the markets is due to internal market technicalities, is it possible that the Fed is being fooled? We have long argued that the Fed will raise rates if the market allows it to, meaning that they would love to have higher rates, but are most concerned about causing asset prices to deflate. That's because we believe much of the recovery since the financial crisis has been based on asset price inflation. Moreover, we believe the Fed wants to avoid putting the economy into recession at just about any cost as they don't want to revert to 0% interest rates and quantitative easing. They are emboldened by an economy that appears to be humming along, a market that appears robust and thinking that if they induce inflation, well, that's a problem they know how to fight.If, however, asset prices floating higher is actually an expression of stress due to exotic strategies being unwound, the Fed might well be emboldened to hike rates more aggressively.

Market crash?

The logical next question is whether investors are being fooled. If higher asset prices are more due to a short-squeeze than fundamentals, and if on top of that, the Fed is more aggressive, are we setting ourselves up for trouble? The stock market crash of 1987 comes to mind.Does that mean investors should liquidate their positions? Does it mean investors should buy insurance? Regarding the latter, we've already pointed out that "insurance" might be very expensive. If you know the market is going to crash tomorrow, by all means, seek protection. That said, we have been cautious on the markets for some time and we have to be aware of the risk that our concern is misplaced.

Underperforming in bull marketsIn my experience, investors swallow losing money in bear markets, but are furious if they don't keep up with the averages during bull markets. When the smartest strategy is to buy the index, bright minds are leaving the industry. What you get is an obsession with indexing.

Beating the average is imposible

Not a week goes by that we aren't told the merits of index based investing. The average active manager is failing to beat the index. Well, duh, that's by definition: the average cannot beat the average once fees are included. But does that mean investors should stop thinking?

Buying the dips can be irresponsible

When markets are in a panic, the pundits tell us to buy the dips. As proof, they show the recovery we had from the market bottom in the financial crisis; or any other dip we have had since. With due respect, that too is the wrong way to look at the issue. Investors ought to invest according to how much risk they can stomach. If they had properly rebalanced, they would have taken chips off the table ahead of the financial crisis and then had the resources to deploy cash at the bottom. Yes, in that case, absolutely, buy when prices are cheap.But that's not how many portfolios look. Many investors go along for the ride during the good times, and are over-exposed to risk assets. They chase returns because they don't have enough money to retire. Then, when the market plunges, they lose a great deal of their net worth. Are you telling me that the appropriate way to react in that situation is to double down and put a now disproportionally larger portion of your net worth at risk? If you cannot stomach the risk of an investment, stay away from it. When you lose money, you can afford to take less risk, not more risk. Any pundit suggesting otherwise is, in my opinion, irresponsible.

Don't confuse indexing with lifestyle investing

If you are a pure index investor w.r.t. equities, you hold the S&P 500 Index and little else; unless you embrace a global view and invest pro-rata in global equities. Very few investors pursue that; instead, we have become what I call lifestyle investors: if you like green tech, you buy a green tech ETF. If you like biotech, you buy a biotech ETF. If you like,..., you get the picture. Sure, you aren't picking stocks anymore, but you are picking winners and losers. Such a strategy may have worked quite beautifully in recent years because, well, because just about everything has gone up. As a result, if you work with a broker, he or she will have tailored your portfolio to what you feel good about. That's fantastic, except if feeling good is all you are looking for, just take your kids to the ball game.

Fees matter

The one thing the indexing community has gotten right is that fees do matter. Again, this is math. If you pay less in fees, all else equal, your returns are higher if your fees are lower. As such, if you buy a popular market index through an ETF fees are very low. It's not surprising that competitive market pressures have pushed prices lower. But it doesn't mean investors should shy away from a more expensive product, if the segment it is in hasn't been commoditized, i.e. when it provides value.

Robo-advisors do some good - and bad

In my assessment, the good news about robo advisors is that they have a rigid process to rebalance portfolios. I do not have a problem with anyone "buying the dips" if it is part of an otherwise comprehensive investment program. As I indicated earlier, I only have a problem with it if buying the dips is done for the wrong reasons, i.e. when it violates the risk tolerance of investors and when it is done in already lopsided portfolios.What robo advisors can't do is to fully assess the risk tolerance of investors when accounts are opened. I say that because I don't think anyone or any machine can do that. Sure, we all fill in our risk tolerance when we open a brokerage account, but for most of us, these are abstract questions. We associate risk with upside risk, not downside risk. And let a portfolio really dive 25% or more, are you still comfortable with the risk tolerance parameters provided? This is a human weakness, but it doesn't mean one can ignore it. I tell investors: if you get sleepless nights because of your investments, you are over-exposed. An investor should look at the most volatile periods and try to assess: would I really be comfortable holding x% of my portfolio in this security/fund if it went down as much as it did in 2008, or some other bad period? Such mind games are ever more difficult the further one is from the most recent crisis; with 2008 being far in the rear-view mirror, I allege there are millions of investors that have not properly assessed their own risk tolerance.The bad of the early generation of robo advisors is that, in my view, they are too limited. They follow the most classic way of investing in stocks and bonds; that's wonderful for normal times. But I question whether, after eight years of stock prices rising, we are in normal times. That said, because such model portfolios have done great, their sales argument is compelling.In my humble opinion, investors may want to take advantage of the good while trying to mitigate the bad. That is, investors may want to have a rigorous investment process that includes rebalancing; they also should look at fees, although they should look at them in the context of what they are buying. If a robo advisor helps in terms of the "good" they may provide, great. However, so long as such investment strategies focus only on the basics, I would caution anyone not to deploy all their assets into such a strategy.

What shall investors do?

During extended bull markets, and the current market qualifies as such, I believe investors lose sight of what investing is all about. Call me old school, but I do not think investing is about chasing indices. Similarly, investing is not about lifestyle investing.At any time, imagine what were to happen if markets were to crumble. How would you be able to pursue your investment goals?If you have savings, you don't need to chase investments; you can pursue your investment goals by looking for value; it's okay not to participate in each and every market rally. If, however, you don't have savings, you feel like you have to chase returns to catch up; in doing so, you are quite likely never to achieve your goals as you'll invest at the top, then realize you are too exposed when prices tumble. In the opinion of yours truly, the irony is that even with modest savings, the more cautious approach should pay off more in the long run.

What do I do?As a registered investment adviser myself, I am not allowed to give specific investment advice in a general analysis such as this one. But I can tell you that for myself: I seek to get my returns with as little equity risk as possible. My current view (which is subject to change at any moment) is that even as I believe equity prices are at risk of a severe correction, buying insurance is too costly given that I know as little about when the next bear market will come as anyone (I do have a hard time believing we'll never have a bear market or financial crisis again). As such, I try to get my returns elsewhere. To the extent that I like specific equities, I hedge out equity risk (this is not an encouragement to use derivatives, as those come with their own set of risks that may not be suitable for many investors). Then, I look to generate return streams that are not correlated with equities. Those that have followed our work for some time know that I try to achieve at least some of that by investing in currencies and precious metals. Those are but two ways of trying to achieve uncorrelated returns.We spend a lot of time on both macro and systematic work. While the heavy hand of policy intervention might be shifting from monetary to fiscal policy, I believe it is nonetheless important to gauge their impact on portfolios. With what I believe are distorted asset prices due to policy makers, we also spend a lot of time using other gauges, such as shifting risk sentiment in the markets.The short of it is that there are many ways I believe one can weather the storm that may lie ahead in the markets. However, what may have been one of the more profitable approaches in recent years, namely to invest and forget, might be hazardous to your wealth in what's ahead.

SINCE his election as president, Donald Trump has not softened his criticism of China over its alleged meddling to control the value of its currency, the yuan. On the contrary, he has called China “the grand champion” of currency manipulators. The kindest interpretation of this is that Mr Trump is out of date, as his own government could tell him.

America’s Treasury makes a six-monthly assessment of the foreign-exchange policies of its big trading partners. The criteria it uses to identify currency manipulators are regarded by many economists as inadequate. They do not include, for example, the domestic purchasing power of a currency. Nevertheless, even by those flawed criteria, China is far from the champion. Indeed it seems to have quit the tournament altogether.

The Treasury uses three measures: whether the country runs a sizeable surplus in trade with America; whether its current-account surplus exceeds 3% of GDP; and whether it spends more than 2% a year to buy foreign assets to suppress the value of its currency. Over the past year, no country has checked all three boxes. China, in the latest report, only met one condition (running a big bilateral surplus in its trade with America).

The Treasury, does not publish a league table of its trading partners. If it did, it would illustrate just how slippery the idea of currency manipulation is. The Economist has used the measures to develop a crude scoring system, to establish which countries would be in Mr Trump’s firing line if his government’s measures were applied consistently (see chart).

Using the current-account metric, we award one “manipulation point” to countries with surpluses at the 3% threshold, two points to economies with surpluses at 6% of GDP, and so on. Similarly, we award one manipulation point for each 2% of GDP spent buying foreign assets to depress the value of its currency. We do not include bilateral trade with America in the scoring: the value of currencies affects trade globally, and some countries such as Mexico run hefty trade surpluses against America but have deficits with the rest of the world.

Awkwardly for America, two of its friends in Asia have recently scored more highly than China: South Korea and, most clearly, Taiwan. But the highest score of all goes to Switzerland, by dint of its whopping current-account surplus and its hefty foreign-currency purchases. This illustrates one of the method’s flaws: in terms of the goods and services that it can actually buy, the Swiss franc is in fact among the world’s most overvalued currencies.

As for China itself, it has been fighting to prop up the yuan in the face of capital outflows, and its score is in fact negative: it has, in other words, raised the price of its currency, not lowered it. Over the past decade, the scoring system shows that China has done progressively less to distort the yuan’s value. That is reflected in the International Monetary Fund’s verdict that the currency is “no longer undervalued”. Or, as Mr Trump might put it: Loser!

LONDON – After the annus horribilis that was 2016, most political observers believe that the liberal world order is in serious trouble. But that is where the agreement ends. At the recent Munich Security Conference, debate on the subject among leaders like German Chancellor Angela Merkel, US Vice President Mike Pence, Chinese Foreign Minister Wang Yi, and Russian Foreign Minister Sergei Lavrov demonstrated a lack of consensus even on what the liberal order is. That makes it hard to say what will happen to it.

When the West, and especially the United States, dominated the world, the liberal order was pretty much whatever they said it was. Other countries complained and expounded alternate approaches, but basically went along with the Western-defined rules.

But as global power has shifted from the West to the “rest,” the liberal world order has become an increasingly contested idea, with rising powers like Russia, China, and India increasingly challenging Western perspectives. And, indeed, Merkel’s criticism in Munich of Russia for invading Crimea and supporting Syrian President Bashar al-Assad was met with Lavrov’s assertions that the West ignored the sovereignty norm in international law by invading Iraq and recognizing Kosovo’s independence.

This is not to say that the liberal world order is an entirely obscure concept. The original iteration – call it “Liberal Order 1.0” – arose from the ashes of World War II to uphold peace and support global prosperity. It was underpinned by institutions like the International Bank for Reconstruction and Development, which later became the World Bank, and the International Monetary Fund, as well as regional security arrangements, such as NATO. It emphasized multilateralism, including through the United Nations, and promoted free trade.

But Liberal Order 1.0 had its limits – namely, sovereign borders. Given the ongoing geopolitical struggle between the US and the Soviet Union, it could not even quite be called a “world order.”

What countries did at home was basically their business, as long as it didn’t affect the superpower rivalry.

After the collapse of the Soviet Union, however, a triumphant West expanded the concept of the liberal world order substantially. The result – Liberal Order 2.0 – penetrated countries’ borders to consider the rights of those who lived there.

Rather than upholding national sovereignty at all costs, the expanded order sought to pool sovereignty and to establish shared rules to which national governments must adhere. In many ways, Liberal Order 2.0 – underpinned by institutions like the World Trade Organization and the International Criminal Court (ICC), as well as new norms like the Responsibility to Protect (R2P) – sought to shape the world in the West’s image.

But, before too long, sovereignty-obsessed powers like Russia and China halted its implementation.

Calamitous mistakes for which Western policymakers were responsible – namely, the protracted war in Iraq and the global economic crisis – cemented the reversal of Liberal Order 2.0.

But now the West itself is rejecting the order that it created, often using the very same logic of sovereignty that the rising powers used. And it is not just more recent additions like the ICC and R2P that are at risk. With the United Kingdom having rejected the European Union and US President Donald Trump condemning free-trade deals and the Paris climate agreement, the more fundamental Liberal Order 1.0 seems to be under threat.

Some claim that the West overreached in creating Liberal Order 2.0. But even Trump’s America still needs Liberal Order 1.0 – and the multilateralism that underpins it. Otherwise, it may face a new kind of globalization that combines the technologies of the future with the enmities of the past.

In such a scenario, military interventions will continue, but not in the postmodern form aimed at upholding order (exemplified by Western powers’ opposition to genocide in Kosovo and Sierra Leone). Instead, modern and pre-modern forms will prevail: support for government repression, like Russia has provided in Syria, or ethno-religious proxy wars, like those that Saudi Arabia and Iran have waged across the Middle East.

The Internet, migration, trade, and the enforcement of international law will be turned into weapons in new conflicts, rather than governed effectively by global rules. International conflict will be driven primarily by a domestic politics increasingly defined by status anxiety, distrust of institutions, and narrow-minded nationalism.

European countries are unsure how to respond to this new global disorder. Three potential coping strategies have emerged.

The first would require a country like Germany, which considers itself a responsible stakeholder and has some international heft, to take over as a main custodian of the liberal world order. In this scenario, Germany would work to uphold Liberal Order 1.0 globally and to preserve Liberal Order 2.0 within Europe.

A second strategy, exemplified today by Turkey under President Recep Tayyip Erdoğan, could be called profit maximization. Turkey isn’t trying to overturn the existing order, but it doesn’t feel responsible for its upkeep, either. Instead, Turkey seeks to extract as much as possible from Western-led institutions like the EU and NATO, while fostering mutually beneficial relationships with countries, such as Russia, Iran, and China, that often seek to undermine those institutions.

The third strategy is simple hypocrisy: Europe would talk like a responsible stakeholder, but act like a profit maximizer. This is the path British Prime Minister Theresa May took when she met with Trump in Washington, DC. She said all the right things about NATO, the EU, and free trade, but pleaded for a special deal with the US outside of those frameworks.

In the months ahead, many leaders will need to make a bet on whether the liberal order will survive – and on whether they should invest resources in bringing about that outcome. The West collectively has the power to uphold Liberal Order 1.0. But if the Western powers can’t agree on what they want from that order, or what their responsibilities are to maintain it, they are unlikely even to try.

We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.